“What Is a Small Business?” Four Categories of Small Business We Can All Understand

In the U.S., there are 30 million small businesses. But one size doesn’t fit all when it comes to answering the question, What is a small business?

We have written extensively about the two reasons why the label “small business” is so popular among companies that are small (and some that are large, also):

1. Customers trust the small business “institutional” brand.

The term “small business” is like an umbrella brand for the institution that is either the #1 or #2 most trusted institution in the U.S. Research from the Pew Trust ranked it No. 1, while Gallup ranked the U.S. military first and small business No. 2. Other less trusted “brands” include universities, religious institutions, universities, government and big businesses.

2. The term “small business” has a statutory definition that benefits a company.

The term “small business” has a statutory (or legal) definition that allows those businesses that meet such a definition the opportunity to qualify for certain types of federal, state and local contracts, loans, tax benefits and grants. Determining the statutory definition of the label “small business” is the responsibility of the U.S. Small Business Administration (SBA).

The SBA Table of Small Business Sizes

In the U.S., the SBA has been authorized by Congress to establish and maintain the legal definition of “small business.” However, for different types of industries, the SBA may define “small business” with varying criteria related to revenues or number of employees. The SBA’s Table of Small Business Sizes is where you can find the official and most up-to-date information about the size criteria for businesses in different industries.

Karen Mills, administrator of the Small Business Administration from 2009–2013 and now a senior fellow at the Harvard Business School, recently described four types of small businesses. She recognizes the need that exists to define various types of small businesses for help in everything from setting policy to targeting assistance. Unlike the marketing types of labels (SOHO, SMB, etc.) that are applied to different types of small business, she describes the categories in a more understandable way, with fewer labels named after animals or acronyms.

Using her criteria (with even fewer labels), here are four types of small businesses. (Note: The groups aren’t mutually exclusive. A business can fit in more than one):

1. Small businesses that have no employees other than the owner

According to the IRS, there are almost 23 million sole proprietorships in the U.S. They cover a wide range of jobs from consultants to roofers. While only about 15 million of the self-employed earn receipts of more than $10,000, recent research shows that sole proprietorships are achieving record profit margins—and numerous indicators predict the number of these businesses will continue to grow as technology allows more geographic flexibility.

2. Small businesses you find on Main Street

There are around 4 million of these types of small businesses: dry cleaners, restaurants, car repair operations and local retailers. They are a part of the “fabric of our lives,” says Mills. And they employ a significant portion of the workforce. Many of these businesses exist to support the owner and his or her family and are not typically focused on expansion. While these businesses close and open quite often, they play a central role in the economy of America’s middle class.

3. Small businesses that are part of major supply chains

This is an important but less well-documented type of small business, says Mills. It is comprised of an estimated 1 million small businesses that are part of commercial and government supply chains. These businesses are often focused on growth, domestically or through exports, and operate with a higher level of management sophistication than Main Street firms. A robust network of small suppliers—manufacturers, distributors, etc.— is important to the long-term competitiveness of large U.S. corporations and for companies considering moving production back to the U.S. from offshore. Much of the logistical flexibility that enables such practices as “just-in-time” delivery is enabled by these suppliers.

4. Growth-oriented small businesses

Despite the non-stop coverage of this group by tech and general business media, only about 200,000 businesses qualify as high growth startups or existing firms. But some of that media obsession is justified as these companies are the heavy-duty job creators of our economy. A recent study by MIT’s Scott Stern and Jorge Guzman showed that the 5 percent of firms registered in Massachusetts that delivered 77 percent of the growth outcomes could be identified by growth factors evident at the time of their original business registration.

However, before becoming too enamored with the impact of this group of small businesses, there is something to consider: While these early stage, fast growth businesses create jobs, they don’t always create a profit for their early stage investors. According to Shikhar Ghosh, a senior lecturer at Harvard Business School, three out of four venture-backed startups fail (The National Venture Capital Association estimates that 25 percent to 30 percent of venture-backed businesses fail).

The importance of NOT treating all small businesses the same

According to Mills, like marketers, policy makers and elected officials can make wrong decisions if they think all small businesses are the same. For example, the businesses along Main Street have different financing needs than a high‐tech startup. Setting up an innovation ecosystem around a university or an emerging technology helps potential high-growth entrepreneurs, while downtown revitalization can help local businesses from the Main Street category.

While they are all small businesses, one size does not fit all when it comes to small business. But the term “small business” is big enough to define them all.